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Investors banking on cannabis changes

US legislators are discussing allowing banking facilities for cannabis businesses. Another step has been made to the legitimisation of a new industry, but investors should take care.

byGarry White

in Features

18.02.2019

A proposal to allow the US banking industry to provide services for marijuana companies was discussed in Washington last week. The big risk for investors in the sector is that, although the vast majority of Americans live in states where some form of legalisation of cannabis has taken place, it remains federally proscribed. This has meant banks and other companies have held back from providing services to any business involved in the fledgling industry. However, proposing legislation that allows banks to operate in a federally-illegal market really does not make sense. As one Republican senator correctly noted, US legislators want to put the cart before the horse. However, the path towards marijuana becoming a fully-legitimate industry appears to be getting clearer.

US companies operating in a legal environment under state laws could be at risk should the federal government decide to stop the industry in its tracks. This means hardly any banking facilities are available for marijuana companies, as financial institutions – quite rightly – fear potential legal repercussions from Capitol Hill should the wind change direction. This is not ideal for a number of reasons. There have been a number of shootings of security guards in robbery attempts because of the vast amount of cash companies are forced to hold outside the banking system. Also, with money not being held in a traceable bank account, there is a high chance of racketeering and tax evasion, two of the very things state legalisation was supposed to prevent.

Now the Democrats control the House of Representatives there is a greater push to resolve the situation. This week’s hearing saw representatives from banks and the cannabis industry testify in front of the House Financial Services subcommittee, urging lawmakers to pass a proposed piece of legislation that would allow pot businesses to access loans, credit lines and other banking facilities. Banks have also been reticent to act as custodians for related exchange-traded funds (ETFs), so any change in the law will likely allow more options for investors that want exposure to the sector.

"Lawmakers are not being asked to weigh in on whether marijuana should be legal or not,” Mason Tvert of advocacy group Marijuana Policy Project told the subcommittee. “They are simply looking at whether banking services should be available to these businesses in states where it is already legal.” California is the largest state where recreational use has been approved and its State Treasurer Fiona Ma also spoke in favour. However, banks are likely to be cautious unless full federal legalisation occurs – and investors should share their caution too.

Perhaps more significantly, last week Senator Ron Wyden of Oregon introduced legislation that would do just that – decriminalise cannabis at the federal level and allow states to operate as they see fit. The S.420 Marijuana Revenue and Regulation Act proposes removing cannabis from the controlled substances schedule, as well as establishing a sliding scale of federal taxation that starts at 10pc before rising gradually to 25pc over five years. It is believed that the bill is now more likely to pass following the departure of Jeff Sessions as Attorney General in November, as he was seen as a major obstacle to legitimising the industry.

A year ago, Mr Sessions rescinded guidance issued during Barack Obama’s presidency – called the Cole Memorandum – that allowed states to legalise cannabis without the threat of federal interference. His likely replacement is much more open to legalisation and the so-called Trump administration “war on cannabis legalisation” looks likely to be over.

Last Tuesday, the Senate voted to break a Democratic filibuster of the nomination of William Barr who President Trump has nominated as Mr Sessions’ replacement. A final vote on his appointment is expected very soon. At the end of January, Mr Barr confirmed he will not continue Mr Sessions push to crack down on legal usage if he is ultimately confirmed by the Senate. “As discussed at my hearing, I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum,” Mr Barr noted. Indeed, President Trump said last week that he may end up supporting a legalisation bill. “We’re looking at it. But I probably will end up supporting that, yes,” the President said.

So, moves to legitimise the industry are now moving ahead. Earlier this month, the World Health Organization (WHO) proposed downgrading cannabis under international law for the first time, in light of growing evidence of its legitimate medicinal benefits. This week, the European Parliament in Strasburg voted in favour of incentivising European nations to increase access to medical marijuana, prioritising scientific research and clinical studies.

This matters to UK-based investors because some platforms have been cautious about allowing clients to purchase shares in this evolving industry because of fears of legal consequences. Some brokers will not allow the purchase of shares that are involved in recreational activities and others have taken a more stringent line and have blocked share purchases in medicinal marijuana companies too.

There is likely to be continuing opposition to Federal legalisation, as the subject is patently controversial, but investor appetite is increasing. The main US listed cannabis ETF, ETFMG Alternative Harvest, surpassed $1bn in assets under management for the first time at the start of February. The legitimisation of this industry looks likely to continue and investors should closely watch these developments.

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